While Sensex and Nifty soar to all-time highs, continuing to cheer upbeat earnings outlook, muted crude oil prices and a rally in global stocks, the broader markets have refused to participate in the rally given interest rate fears, political uncertainties, and macro concerns. Vinay Paharia, CIO of Union AMC sounds a note of caution, pointing out that valuations in the stock market remain elevated.
With the Nifty trading at a trailing PE multiple of 22x, valuations are expensive, Paharia says, adding that he remains ‘cautiously optimistic’ in the near-to-medium term. The 50-share index reclaimed the 11,000 mark yesterday. Nifty was seen trading at 11,027 this morning. Global macro risks will weigh on Indian stock markets, he says. Higher cost of capital, fall in global liquidity, increased trade tensions and rise in crude oil prices are some of the risks being watched closely by the stock market participants.
Sushruth Sunder of FE Online recently interviewed Vinay Paharia, CIO, Union AMC, which has nearly Rs 4,500 crore in assets under management. Paharia shares his outlook on the stock market, tapering mutual fund inflows, the goods and services tax and where he’s finding value in the current market. Here are the edited excerpts:
What is your near-to-medium term view on the stock market outlook?
Indian economy has been recovering smartly from the twin shocks of Demonetization (2016) and Goods and Services Tax (GST) implementation (2017). We expect FY19 and FY20 to be years of swift recovery. We believe the economy can also get a tailwind from cyclical improvement in investment demand in the near to medium term. However, we are also cognizant of lurking global macro risks in the form of higher cost of capital, reduction in global liquidity due to unwinding of quantitative easing policies of developed world central banks, increased trade tensions and rise in crude oil prices. Market valuations remain elevated, with Nifty trading at a Price-Earnings multiple of 22x trailing twelve months’ earnings, which is higher than long period average. Midcap and smallcap companies are even more expensive relative to their historical valuations. Hence, we remain cautiously optimistic on the markets and expect the markets to provide modest returns over the next 5 years period.
The mutual fund inflows have not been as robust as they were even six months ago. Do you feel this is a temporary blip, or that we will not see those kind of higher inflows?
There has been some slowdown in the net inflows recently. However, one needs to understand it in context of strong base of 18% compounded growth in Mutual Fund Assets under Management (AUM) over last 8 years. The penetration levels of the MF industry is still very low, with the total AUM to GDP ratio at just about 12% currently, which is far lower than global average of about 55%.
There seems to be an earnings bounce back in the latest quarter. Which sectors have done well in your assessment, which sectors must investors look at?
India Inc. reported robust fourth quarter earnings for FY18, with strong growth in underlying earnings. Sectors which did well included NBFCs, Oil & Gas, Utilities and Consumer Staples. In the forthcoming quarter, we expect a strong growth in earnings for corporate India led by a favorable base effect. We believe the risk-reward payoff is attractive in IT, Consumer Discretionary (mainly Automobiles) and Healthcare Sectors.
How should investors tread given factors such as the upcoming elections, rising crude oil prices, interest rates etc.
These are important events which can shape the near term earnings outlook. Increased crude oil prices can stoke inflation, which in turn can increase the cost of capital. Hence, these are real risks which we should be aware of. However, according to us these are also transient factors which keep changing with regular frequency and hence should not be used as primary tools to make investment decisions. As investors, we should focus on longer term structural value drivers which determine a company’s earnings multiple and hence are more important.
What kind of portfolio positioning have you taken with respect to the equity funds that you oversee?
Currently we are overweight IT, Consumer Discretionary (mainly Automobiles) and Healthcare Sectors. We are currently underweight Financial Services sector. We believe that the companies in the sector could suffer due to a rise in cost of capital. The margins in the sector could be impacted due to rise in cost of their primary raw material, i.e., money.
Disclaimer: The views expressed or statements made in this document are purely the views of the author and do not necessarily represent the views of either Union Asset Management Company Private Limited or its affiliates.